Advantages and Disadvantages of Buying a Franchise
Becoming an entrepreneur by way of franchising has many advantages and disadvantages. When you are your own boss, you have the freedom to call the shots, but you also face financial risks that not many entrepreneurs are ready to undertake.
Franchising minimizes much of the risks involved in launching a business. At a startup, you're expected to shoulder all of the responsibilities and costs for the success of your new venture. A franchise, however, allows you to build off of an established business model developed by the franchisor.
This business model is based on the franchisor’s vision, core values, and business practices, and has likely proven successful countless times, implemented by other franchisees in different cities and states across the country. Using a proven business model as a blueprint to build your business is a great way to ensure success.
Your franchisor also wants your business to succeed. Failure risks tarnishing the brand’s image in your community and will bring financial loss to the franchisor. A franchisor minimizes this risk by providing you with a proven business model ahead of launching your franchise, as well as ongoing training and support.
By law, a franchisor must also give you all of the information necessary for you to decide if franchising is right for you. This includes an outline of all the risks, benefits, or limits you might face as a franchisee, the fees and expenses you will have to shoulder, the franchisor’s litigation history, a list of approved business vendors or suppliers, and the franchisor’s estimated financial performance expectations.
Aside from that, when you own a franchise, you will not be alone. Depending on the type of franchise you buy, your corporate partner will likely be with you every step of the way, from initial startup to daily operation assistance, until the franchising agreement expires or ends.
Aside from that, when you own a franchise, you will not be alone. Depending on the type of franchise you buy, your corporate partner will likely be with you every step of the way, from initial startup to daily operation assistance, until the franchising agreement expires or ends.
You will be building your business based on the franchisor’s proven business model, with you and your staff receiving initial and ongoing training. You will be selling products and services most consumers are already familiar with, guaranteeing that the business will generate revenue early on.
All of these advantages tend to overshadow the disadvantages, which need to be taken into consideration, too. To begin with, you need to understand that a franchise is not an independent business you can run or customize as you see fit. Franchisees must adhere to the franchisor’s corporate policies, rules, and restrictions and abide by them. Some entrepreneurs consider this the biggest drawback to franchising.
Other drawbacks to franchising include:
- Paying high startup costs.
- Requiring a substantial amount of liquid capital.
- Paying royalty fees and additional business costs for marketing and advertising, for example.
To many, the benefits of franchising certainly seem to outweigh the risks. Deciding whether you should become a franchisee or not is a personal decision — one that is generally based on how much risk you are willing to shoulder.
To help give you a better idea of what franchising entails, here is a closer look at some of the advantages and disadvantages of franchising.
Advantages of Franchising
From using a proven, existing business plan as the framework of a new franchise to reaping the benefits of ongoing corporate training and support, franchising has several advantages that any entrepreneur should consider. Here are a few advantages of starting a franchise:
Existing Business Plan
When you purchase the licensing rights to open a franchise, you will be using an existing business plan to launch the new venture. This existing business plan acts as a blueprint. It's typically developed by the franchisor’s corporate office for several years and has repeatedly proven successful.
Working with this existing business plan means less work will be required from you upfront in terms of planning. The preliminary work has already been done. With the initial legwork completed, you're able to focus on the training you will receive from the corporate office. If you plan on running a business format franchise like a retail store, a gym, or a casual dining restaurant, that training will be indispensable.
Access To Training Materials and Additional Support
When you decide to purchase a franchise, a franchisor’s corporate office will typically provide you with all of the initial and ongoing management training you need to succeed. It will also extend ongoing training to your employees, grooming them to excel in their existing roles as well as lining them up for promotions or possible leadership positions.
Additionally, because a franchise is based on a corporate brand that already has an established name, many prospective job candidates are already familiar with the products or services your business provides. Because of this, the number of applicants could be much larger than other businesses that have little to no name recognition, giving you access to a broader — and oftentimes better — pool of talent. Also, if your franchise is already up and running, recruiting new staffers will be much easier.
Reduced Risk, Easier Expansion
Risk is always a part of franchising, particularly where costs are concerned. But because most franchisors stick with their franchisees throughout the franchising process, from the purchase of licensing rights to the grand opening and throughout the period of the franchise’s operation, the risk of failure is greatly reduced.
As we already mentioned, it is not in the best interest of a franchisor to abandon you and let your franchise fail, neither through your own fault nor on account of unforeseen events, like the fallout from a global pandemic. A failed franchise could harm the franchisor’s overall business and tarnish the brand’s reputation, so franchisors tend to prioritize supporting their franchisees.
If your franchise is a success and you decide to open a second location, your history with the franchisor will serve as a great stepping stone in accomplishing that. Once you are dedicated to your franchise and prove it to be a successful venture, your franchisor may reward you with access to funding if you decide to expand.
Buy Into an Existing Community of Owners
Several brands have countless franchises in cities and towns across the U.S. If you become a franchisee for McDonald’s or Taco Bell, for example, you will be joining an existing community of franchisees in your area.
Because you are all essentially on the same team, supporting your corporate franchisor, you can typically turn to your fellow franchisees for guidance or assistance.
Many franchisors designated a field consultant to support and assist franchisees at their locations. This individual acts as a sort of liaison between you and your fellow franchisees, fielding questions and concerns on behalf of the company, strengthening the franchise network in a territory.
Disadvantages of Franchising
When you have a large amount of capital saved up and are looking to launch your own business, you might want to see only the advantages of owning a franchise rather than any of the drawbacks.
From high startup costs and liquid capital requirements to being bound by contractual agreement stipulations, here is a look at some of the disadvantages of starting a franchise:
Franchise Fees and Startup Costs
Launching a franchise requires a significant amount of capital upfront. The initial startup fee you will have to pay varies by franchisor, and that particular amount can range anywhere between several thousands of dollars to upwards of millions.
Opening a fast-food franchise, like a McDonald’s, Taco Bell, Burger King, or Wendy’s, for example, will cost you at least $1 million in startup costs. You will also need to have a specific amount of liquid capital, or assets you can quickly convert to cash. McDonald’s requires that you have at least $500,000 in liquid assets if you plan on opening one of its franchises. Taco Bell requires $750,000 in liquid capital, while Wendy’s requires $2 million.
That does not factor in the annual licensing fee you will be expected to pay to keep the franchise active along with other business costs for, say, marketing and advertising. You will also have to pay royalty fees, which typically range somewhere between 4% and 12%, though sometimes the amount can be higher than that, depending on your franchise industry. Royalty fees are deducted from your franchise’s monthly revenues.
We already looked at the more expensive franchises. The least expensive ones are much more affordable, with startup costs ranging between $9,800 to around $15,000. While these lower-cost options might seem easier to launch, especially if you have enough capital saved up, they are typically in niche markets that target specific customers — meaning they have a limited reach. They can also be a bit riskier, particularly if the economy sours.
Dream Vacations, Complete Weddings + Events, and Showhomes Home Staging are just a few examples of low-cost franchises. A Dream Vacations franchise operates as a home-based travel agency with a startup cost of $9,800, with royalty fees ranging between 1.5% to 3% of annual commissionable sales.
Complete Weddings + Events has a startup cost of around $10,000, with a royalty fee requirement of 8% in annual gross revenue. Showhomes Home Staging, which temporarily decorates vacant homes that are up for sale, costs the same to start up as Complete Weddings + Events. Still, its royalty fees are slightly higher, costing around 10% of annual gross revenue.
If the economy is doing well and people are traveling, planning weddings, or interested in buying homes, any one of these ventures could prove profitable. In more trying times, like a global pandemic, business could drop drastically, hurting your investment.
Reduced Overall Control Over Brand
The second disadvantage of franchising is the limited control a franchisee has over his or her franchise, let alone overall control of the brand.
Through the daily operation of your franchise, you may start to see certain gaps or patterns in business that you might be tempted to improve upon. Say you run a pizza franchise in an area gripped by the latest chicken sandwich craze.
You may see dozens of cars at lunch every day in the drive-thru of the nearest burger franchises, but there is nothing you can do to compete with them. Even though you may have a chicken sandwich recipe that tops the rest, your franchisor will not allow you to add the item to its standardized menu because it is not part of the brand.
Accepting that you have no creative control over the franchise is part of being a franchisee.
Commitment to a Contractual Agreement
A franchise contract is a temporary agreement that expires after a certain time period, typically between five and 30 years. The contractual agreement specifies what you can and cannot do as a franchisee, and not much flexibility is offered for you to make changes to the franchise itself.
Your commitment to your contract also necessitates reduced control over the brand. You may think certain creative changes could be made to boost business, but that does not mean your franchisor will allow it.
Trying to skirt around this and making changes anyway will be costly. Your franchisor could penalize you for breach of contract, and things can only escalate from there.
Core Community of Customers Is Less Strong
You may open a franchise believing customers will flock to your business out of loyalty to the brand — and some might, but not all of them. Just because customers are loyal to a brand does not mean they will be loyal to a particular franchise, especially if they are not happy with their service. Unless your franchise is the only one in town, customers can easily switch to another franchise and shop there, even if it requires a farther drive.
The only way to correct this is by improving on the specific issues customers have with your franchise. You will need to invest time and energy into finding out what has been going wrong to make it right. And there is no guarantee this effort will work.
Franchising works best when you are an entrepreneur looking to invest your capital in launching a venture built on a solid business model. While a franchise may cost a bit more upfront than a startup and require you not to deviate from the brand creatively, your venture will bring with it the name recognition you need to establish a customer base in your community fairly quickly.
Above all, you will receive all the support you need from your franchisor to minimize business risk so that you can succeed. And as an entrepreneur, who doesn't want guaranteed success?